Gov. Arnold Schwarzenegger calls on state lawmakers to settle their differences and reach a solution to the growing state budget deficit during a Capitol news conference in Sacramento, Calif., Wednesday, Dec. 10, 2008.(AP Photo/Rich Pedroncelli) less

Gov. Arnold Schwarzenegger calls on state lawmakers to settle their differences and reach a solution to the growing state budget deficit during a Capitol news conference in Sacramento, Calif., Wednesday, Dec. ... more

Photo: Rich Pedroncelli, AP

State eyes $10 billion in stimulus for budget

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California state budget officials hope to use as much as $10 billion from the looming federal stimulus package to avoid borrowing money to offset the state's gaping $42 billion deficit.

A budget deal being finalized Thursday between Gov. Arnold Schwarzenegger and legislative leaders still would include deep spending cuts and temporary tax increases, officials said.

Assembly Speaker Karen Bass, D-Baldwin Vista (Los Angeles County), said she believes a budget agreement through June 2010 is about "99 percent" complete after more than three months of negotiations.

The Assembly is scheduled to vote on the plan Saturday, and Schwarzenegger was also upbeat about the prospects of closing the months-long budget impasse.

"I think it's very clear that legislative leaders have been very courageous so far because of the tremendous pressure" that they faced from conservative and liberal interest groups, he said Thursday after a ceremony in Sacramento marking the 200th anniversary of Abraham Lincoln's birth.

Californians can be "very proud of the Legislature and the work they've done so far," the governor said, adding that there were still a few issues to be worked out.

Schwarzenegger and legislative leaders have said California should craft its budget package without a federal bailout in mind, but more recently they have said they wouldn't mind using federal aid to avoid additional borrowing to solve the state's huge deficit.

The latest budget plan is made up of nearly $16 billion in spending cuts, more than $14 billion in temporary tax increases and about $11 billion in borrowing from Wall Street.

Spending reductions are broad and deep, and they will impact school-age children, college students, the poor and the disabled. The new tax proposals are just as far-reaching, from a 1-cent hike in the state sales tax, a state income tax increase, a 12-cents-a-gallon gas tax increase and an increase in the vehicle license fee.

The budget plan includes borrowing $5 billion from Wall Street against future state lottery sales, plus seeking $5.9 billion more in short-term loans. The short-term loans could cost the state hundreds of millions of dollars in fees alone.

Stimulus package aid

But state officials hope that the federal stimulus package will deliver $8 billion to $10 billion that would help California's government ease the giant budget gap in its general fund, which is used to run day-to-day programs and services.

That money would allow the state to avoid having to seek the short-term loans, Democratic staffers said Thursday. Funds from the stimulus package also would ensure that the state ends the 2009-10 fiscal year with about $2 billion in cash reserves.

After padding the reserves, state officials hope there would be enough federal funds left over to allow them to lower the proposed income tax increase and avoid about $900 million worth of cuts in grants to the poor and disabled, public universities and the state's court system.

But Assemblyman Chuck DeVore, R-Irvine, argued that federal stimulus dollars shouldn't be used to avoid spending cuts because the additional revenue will come from a one-time source.

"We still would not be living within our means," DeVore said.

Layoff warning notices

With the state's cash crunch worsening, Schwarzenegger will follow through with his promise to send layoff warning notices to 20,000 state employees today unless he and legislative leaders agree on a budget deal, said Aaron McLear, a spokesman for the governor.

Schwarzenegger said he would lay off as many as 10,000 state employees by July 1 to save the state about $750 million in the next fiscal year.

Some counties are expected to go to court today to block the state from withholding funds for services such as grants to the poor and Medi-Cal. State Controller John Chiang has said he will delay more than $3 billion in payments this month to keep the state from insolvency.

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